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Battered U.S. music industry reviving, thanks to streaming

By Lucas Shaw, Bloomberg

Updated:
09/21/2016 10:20:40 AM EDT

A pair of audio headphones hang from a lampshade at the musicstreaming company Spotify in Berlin. BLOOMBERG PHOTO BY KRISZTIAN BOCSI

After almost two decades of relentless decline caused by piracy and falling prices, the music business is enjoying a fragile recovery thanks to the growth of paid streaming services like Spotify and Apple Music.

The U.S. industry is on pace to expand for the second straight year -- the first time that's happened since the CD sales peaked in 1998 and 1999. Retail spending on recorded music grew 8.1 percent to $3.4 billion in the first half of 2016, according to a midyear report from the Recording Industry Association of America that was obtained by Bloomberg News.

The credit goes to streaming -- Internet services that give listeners commercial-free access to millions of songs for a monthly fee, or for free if they're willing to hear ads. U.S. streaming revenue grew 57 percent to $1.6 billion in the first half of 2016 and accounted for almost half of industry sales.

"It feels like the market is slowly recovering after years of being in crisis and shrinking," said Zach Katz, the head of U.S. operations at BMG Rights Management GmbH, a record label and music publisher whose artists have included M.I.A. and Blink 182. "It's absolutely a step in the right direction."

The results can be seen in the financials of music companies big and small. The three major record labels -- Vivendi SA's Universal Music Group, Warner Music Group, owned by billionaire Len Blavatnik, and Sony Music Entertainment -- have all reported gains this year. BMG, a smaller label and publisher, reported a 4.

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6 percent sales increase for the first half of the year.

The industry is reluctant to declare victory. Annual sales have hovered around $7 billion for six years, down by half from the 1999 peak, according to RIAA data. Meanwhile the labels are still negotiating new contracts with Google Inc.'s YouTube and Spotify, two of the largest purveyors of free music in the world.

While sales from ad-supported, on-demand streaming grew 24 percent to $195 million in the first half of 2016, according to the RIAA report, those services aren't doing enough to convince people to pay for music and and don't make enough money off their free users, RIAA Chairman Cary Sherman said in a blog post.

"Many services rake in billions of dollars for themselves on the backs of music's popularity but pay only relative pennies for artists and labels," Sherman wrote. "Pirate sites operate with seeming impunity."

Nor is this the first time new technology has come along to get people to pay online. Apple Inc. co-founder Steve Jobs convinced record labels that iTunes would save the industry from piracy, only to vaporize album sales by selling singles instead.

Yet Apple is no longer the only player in the market for digital music. Spotify operates a larger paid subscription service and has showed no signs of slowing down since Apple Music began competing in that market. Most of the users for Apple Music are people new to paying music, not former Spotify customers, according to label executives.

The arrival of new competitors could further boost sales. Amazon.com Inc., the world's largest Internet retailer, is investing in a paid music service to help sell other goods on the e-commerce site. It will introduce a standalone music service by the end of the year, people with knowledge of the matter said in June.

Pandora Media Inc., the largest online radio service in the world, will also introduce a paid, on-demand service by year's end, and aims to convert 10 percent of its 78 million free users into paying customers by 2020. IHeart Media Inc. also plans a paid streaming service, the New York Post reported Tuesday, citing people with knowledge of the matter.

For the good news to continue, sales of paid subscriptions must outpace the declining purchases of music, whether downloaded or on a CD. Physical music sales tumbled 14 percent while downloads also shrank by a double-digit percentage. Streaming holds promise because the cost of a one-year subscription -- $120 -- is more than the average consumer spent on CDs, even at the peak.

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